Section 54

Analysis of Section 54 of Income Tax Act

We all know that on selling or transferring Capital Assets either long term or Short term, capital gains arise which are taxable in the hands of the taxpayer. 

Let’s understand with the help of an example

Mr. Jorden purchased a house for Rs. 50 Lakh in July 2012. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said property was held for over 36 months and was, therefore, deemed as a long-term capital asset.

ParticularsAmount
Sale Consideration1,80,00,000
Less: Index Cost of Acquisition (50,00,000*280/200)70,00,000
Long Term Capital Gains90,00,000

If Mr. Jorden does not invest the Capital gains then he is liable to pay Capital Gains Tax on INR 90

He can save entire capital gains or substantial capital gains by investing in Section 54 of Income Tax. 

Let’s Understand

Under Section 54 of the Income Tax Act, an individual or HUF selling a residential house property can claim exemption from such capital gains if they invest the proceeds purchase or construction of another residential house property within the stipulated time period. 

For claiming this tax benefit, there are certain prescribed conditions which needs to be satisfied. The same has been explained one by one in this guide further.

Who can claim the benefits under Section 54?

  • Individuals or HUF are eligible to claim this benefit. 
  • The house property should be a long term capital asset.
  • The property that is to be sold should be a residential house. 
  • In case if new residential house property it should be purchased either 1 year before sale or 2 years after the date of sale or transfer. 
  • In case of construction of house property within 3 years of the date of transfer or sale
  • The house property should be in India

What is the Amount of Exemption Available Under Section 54 of the Income Tax Act?

Lower of

Capital gains arising on sale of a residential house.

or

Investment made in purchase or construction of a new residential house property. 

Balance capital gains (If any) will be taxable.


To illustrate:

Mr Jorden sells his house property for Rs 55,00,000/-

With the proceeds of the sale, he purchases villa for Rs 30,00,000/-

Capital Gains will be computed as follows

ParticularsAmt (Rs)
Capital gain on transfer of residential house55,00,000.00
Less: Investment made in residential house property30,00,000.00
Balance – Capital Gains25,00,000.00

Which are the mandatory conditions for availing exemption u/s Section 54?

  • Purchase a new residential property or construct a new house property.
  • Purchase House Property within one year before the sale or two years after the sale of the house property or constructed within three years of the date of transfer or sale.
  • If the individual fails to construct or purchase a new house property within the stipulated time period, he or she can deposit the capital gains proceeds in Capital gains Account Scheme in any public sector bank and avail the exemption from this section.

What is Capital Gains Account Scheme?

If the asset is sold and assess is not able to purchase new house property or construct within time limits, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.

The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as a cost while claiming the deduction.

What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54 of the income tax act is claimed. And the following situations can arise:

Situation 1:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. And the total sales value of new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.

Situation 3:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on house property sold. And capital gains will be taxed at 20%.

Mr. Jorden purchased a house for Rs. 50 Lakh in July 2012. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said property was held for over 36 months and was, therefore, deemed as a long-term capital asset.

Additional Info : Jorden Purchased New house in FY 18-19 amounting 70 Lacs

ParticularsAmount
Sale Consideration1,80,00,000
Less: Index Cost of Acquisition (50,00,000*280/200)70,00,000
Long Term Capital Gains90,00,000
Less : Exemption U/s 5470,00,000
Taxable Capital Gains20,00,000

Published By: akash On 08/16/21 12:25 PM